What changed in this filing

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Item 1. Financial Statements

2024-03-18 compared with 2023-09-14 · 229 added, 324 removed, 233 unchanged (70% of the section changed)

4 unchanged sentences

(In thousands)

Nine Months Ended July 31,

Three Months Ended January 31,

OPERATING ACTIVITIES:

Consolidated net (loss) income

Adjustments to reconcile consolidated net (loss) income to net cash provided by (used in) operating activities:

Consolidated net loss

Adjustments to reconcile consolidated net loss to net cash provided by operating activities:

Bad debt expense

8 unchanged sentences

Right-of-use assets

Other long-term assets

Accounts payable

1 unchanged sentence

Income taxes payable

Other current liabilities

Net cash provided by operating activities

1 unchanged sentence

Capital expenditures

Purchase of Microlab, net of cash acquired ($ 33 )

Net cash used in investing activities

1 unchanged sentence

Proceeds from exercise of stock options

Debt issuance cost

Revolving credit facility

Line of credit payments

Term Loan payments

Net cash (used in) provided by financing activities

Net cash used in financing activities

Net decrease in cash and cash equivalents

1 unchanged sentence

Cash and cash equivalents, end of period

Supplemental cash flow information –

income taxes paid

Supplemental cash flow information – income taxes paid

See Notes to Unaudited Condensed Consolidated Financial Statements.

2 unchanged sentences

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 –

Unaudited interim condensed consolidated financial statements

Our accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q.

Note 1 – Unaudited interim condensed consolidated financial statements

Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.

1 unchanged sentence

Information included in the condensed consolidated balance sheet as of October 31, 2023 has been derived from, and certain terms used herein are defined in, the audited consolidated financial statements of RF Industries, Ltd.

as of October 31, 2022 included in our Annual Report on Form 10-K (“Form 10-K”) for the year ended October 31, 2022 that was previously filed with the Securities and Exchange Commission (“SEC”).

Operating results for the nine months ended July 31, 2023 are not necessarily indicative of the results that may be expected for the year ended October 31, 2023.

as of October 31, 2023 included in our Annual Report on Form 10-K (“Form 10-K”) for the year ended October 31, 2023 that was previously filed with the Securities and Exchange Commission (“SEC”).

Operating results for the three months ended January 31, 2024 are not necessarily indicative of the results that may be expected for the year ended October 31, 2024.

The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in our Form 10-K.

1 unchanged sentence

The propriety of using the going-concern basis is dependent upon, among other things, the achievement of future profitable operations, the ability to generate sufficient cash from operations and potential other funding sources, in addition to cash on-hand along with the current Credit Facility (as defined below), to meet its obligations as they become due.

Although we have incurred operating losses during the nine months ended July 31, 2023, we have implemented certain cost-cutting measures to reduce our operating expenses and to help drive positive operating cash flow and increase liquidity.

Although we have incurred operating losses during the three months ended January 31, 2024, we have implemented certain cost-cutting measures to reduce our operating expenses and to help drive positive operating cash flow and increase liquidity.

Our plan includes consolidating facilities and recognizing the related operating efficiencies and synergies in our production operations.

The Company intends to continue to pursue additional continuous improvement and cost reduction measures, as well as organic growth in revenue and profitability.

Management believes that these actions will enable the Company to continue as a going concern through at least 12 months from the date these unaudited condensed consolidated financial statements are available to be issued.

As of January 31, 2024, the Company was in compliance with the covenants contained in the Loan Agreement, dated as of February 25, 2022 (as amended, the “Loan Agreement”), between the Company and Bank of America, N.A.

(the “Bank”), under which the Bank had provided the Company with a $ 17 million term loan (the “Term Loan”) and a $ 3 million revolving credit facility (the “Revolving Credit Facility” and together with the Term Loan, the “Credit Facility”).

In January 2024, given the economic conditions and the associated impact on earnings, the Company entered into Amendment No.2 to the Loan Agreement to modify the financial covenants in order to avoid a potential covenant violation during the fiscal quarter ending January 31, 2024.

In February 2024, the Company entered into Amendment No.

3 to the Loan Agreement to further modify certain financial covenants in order to avoid potential violations.

The amendments effect changes to certain provisions and covenants in the Loan Agreement as noted in Note 12.

On March 15, 2024, the Company entered into the EBC Credit Agreement (as defined below), pursuant to which proceeds from initial drawings under the EBC Credit Facilities (as defined below) were used to repay in full outstanding obligations under the Loan Agreement.

The Loan Agreement was terminated upon entry into the EBC Credit Agreement.

Principles of consolidation

The accompanying unaudited condensed consolidated financial statements for the periods ended on or before January 31, 2022 include the accounts of RF Industries, Ltd.

and our four wholly-owned subsidiaries:

Cables Unlimited, Inc.

(“Cables Unlimited”), Rel-Tech Electronics, Inc.

(“Rel-Tech”), C Enterprises, Inc.

(“C Enterprises”), and Schroff Technologies International, Inc.

(“Schrofftech”).

The unaudited condensed consolidated financial statements for the three and nine months ended July 31, 2023 include the accounts of RF Industries, Ltd.

and our five wholly-owned subsidiaries:

Cables Unlimited, Inc.

(“Cables Unlimited”), Rel-Tech Electronics, Inc.

(“Rel-Tech”), C Enterprises, Inc.

(“C Enterprises”), Schroff Technologies International, Inc.

(“Schrofftech”), and Microlab/FXR LLC (“Microlab”).

Microlab is a wholly-owned subsidiary that RF Industries, Ltd.

acquired on March 1, 2022.

For periods on or before January 31, 2022, references herein to the “Company”, “we”, “us”, or “our”

shall refer to RF Industries, Ltd., Cables Unlimited, Rel-Tech, C Enterprises, and Schrofftech and for all periods after January 31, 2022, reference to the “Company”, “we”, “us”, or “our”

shall refer to RF Industries, Ltd., Cables Unlimited, Rel-Tech, C Enterprises, Schrofftech and Microlab.

The accompanying consolidated financial statements include the accounts of RF Industries, Ltd., Cables Unlimited, Inc.

(“Cables Unlimited”), Rel-Tech Electronics, Inc.

(“Rel-Tech”), C Enterprises, Inc.

(“C Enterprises”), Schroff Technologies International, Ltd.

(“Schrofftech”), and Microlab/FXR LLC (“Microlab”), wholly-owned subsidiaries of RF Industries, Ltd.

All intercompany balances and transactions have been eliminated in consolidation.

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These two types of inputs have created the following fair-value hierarchy:

Level 1—

Quoted prices for identical instruments in active markets;

Level 2—

Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and

Level 3—

Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

As of July 31, 2023 and October 31, 2022, the carrying amounts reflected in the accompanying unaudited condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, and accounts payable approximated their carrying value due to their short-term nature.

Level 1— Quoted prices for identical instruments in active markets;

Level 2— Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets;

Level 3— Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

As of January 31, 2024 and October 31, 2023, the carrying amounts reflected in the accompanying consolidated balance sheets for cash and cash equivalents, accounts receivable, and accounts payable approximated their carrying value due to their short-term nature.

Recent accounting standards

Recently issued accounting pronouncements not yet adopted:

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, 

Financial Instruments —

Credit Losses , which requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected.

Recently issued accounting pronouncements adopted:

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (ASU) 2016-13, Financial Instruments — Credit Losses , which requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected.

The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset.

The guidance is effective for fiscal years beginning after December 15, 2019. In November 2019, the FASB issued ASU 2019-10, 

Financial Instruments —

Credit Losses (Topic 326), which pushes back the effective date for public business entities that are smaller reporting companies, as defined by the SEC, to fiscal years beginning after December 15, 2022. Early adoption is permitted.

We are currently evaluating the impact the adoption of this new standard will have on our unaudited condensed consolidated financial statements.

Note 2 –

Business acquisition

On March 1, 2022, the Company completed its purchase (the “Purchase Transaction”) of 100 % of the issued and outstanding membership interests of Microlab, a New Jersey limited liability company, from Wireless Telecom Group, Inc, a New Jersey corporation (the “Seller”) pursuant to the Membership Interest Purchase Agreement (the “Purchase Agreement”) dated December 16, 2021, with the Seller.

The consideration for the Purchase Transaction was $ 24,250,000 , subject to certain post-closing adjustments as set forth in the Purchase Agreement.

The purchase price was paid in cash at the closing.

The Company funded $ 17 million of the cash purchase price from the funds obtained under the Term Loan (as defined in Note 13) and paid the remaining amount of the cash purchase price with cash on hand.

During the three months ended July 31, 2022, we paid an additional $ 225,000 in purchase consideration as a result of certain post-closing adjustments relating to net working capital.

The acquisition was accounted for with the acquisition method of accounting.

The acquired assets and assumed liabilities have been recorded at their estimated fair values.

We determined the estimated fair values with the assistance of appraisals or valuations performed by an independent third-party specialist.

Microlab designs and manufactures high-performance radio frequency and microwave products enabling signal distribution and deployment of in-building DAS (distributed antenna systems), wireless base stations and small cell networks.

The Microlab acquisition further diversifies and strengthens the portfolio of products that we offer to the market and allows us to provide a more complete solution to our customers in key market segments.

All manufacturing operations are performed at Microlab’s facilities in New Jersey.

The acquisition closed on March 1, 2022, accordingly, subsequent to March 1, 2022, Microlab’s financial results have been included in the results of the RF Connector and Cable Assembly (“RF Connector”) segment as well as in the condensed consolidated statements of operations.

The Company expects the goodwill recorded to be deductible for income tax purposes.

Acquired amortizable intangible assets are being amortized on a straight-line basis over their estimated useful lives ranging from one to 15 years.

Total costs, as of October 31, 2022, related to the acquisition of Microlab were approximately $ 1.3 million and have been expensed as incurred and categorized in selling and general expenses.

The following table summarizes the components of the purchase price at fair values at March 1, 2022:

Cash consideration paid at closing

Post-closing adjustment

Total consideration transferred

The following table summarizes the allocation of the preliminary purchase price at fair value at March 1, 2022:

Current assets

Property and equipment

Intangible assets

Noninterest-bearing liabilities

Net assets acquired at fair value

The following unaudited pro forma financial information presents the combined operating results of the Company and Microlab as if the acquisition had occurred as of the beginning of the earliest period presented.

Pro forma data is subject to various assumptions and estimates and is presented for informational purposes only.

This pro forma data does not purport to represent or be indicative of the consolidated operating results that would have been reported had the transaction been completed as described herein, and the data should not be taken as indicative of future consolidated operating results.

Unaudited pro forma financial information assuming the acquisition of Microlab as of November 1, 2021 is presented in the following table:

Three Months Ended July 31,

Nine Months Ended July 31,

Net (loss) income

(Loss) Earnings per share

Note 3 –

Concentrations of credit risk

The guidance is effective for fiscal years beginning after December 15, 2019.

In November 2019, the FASB issued ASU 2019-10, Financial Instruments — Credit Losses (Topic 326), which pushes back the effective date for public business entities that are smaller reporting companies, as defined by the SEC, to fiscal years beginning after December 15, 2022.

The guidance was effective for the Company beginning on November 1, 2023 and the adoption of this standard had no material impact on the Company’s condensed consolidated financial statements or related disclosures.

Recently issued accounting pronouncements not yet adopted:

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures , which expands annual and interim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant segment expenses.

ASU 2023-07 is effective for our annual periods beginning January 1, 2024, and for interim periods beginning January 1, 2025, with early adoption permitted.

We are currently evaluating the potential effect that the updated standard will have on our financial statement disclosures.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740):

Improvements to Income Tax Disclosures to expand the disclosure requirements for income taxes, specifically related to the rate reconciliation and income taxes paid.

ASU 2023-09 is effective for our annual periods beginning January 1, 2025, with early adoption permitted.

We are currently evaluating the potential effect that the updated standard will have on our financial statement disclosures.

Note 2 – Concentrations of credit risk

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable.

We maintain our cash and cash equivalents with high-credit quality financial institutions.

At July 31, 2023, we had cash and cash equivalent balances in excess of federally insured limits in the amount of approximately $ 2.9 million.

At January 31, 2024, we had cash and cash equivalent balances in excess of federally insured limits in the amount of approximately $ 3.7 million.

Sales from each customer that were 10% or greater of net sales were as follows:

Three Months Ended July 31,

Nine Months Ended July 31,

Three Months Ended January 31,

Wireless provider

Distributor A

For the three months ended July 31, 2023, a distributor customer accounted for 12 % of net sales and 12 % of total net accounts receivable balance, and a wireless carrier customer accounted for less than 10% of net sales.

For the nine months ended July 31, 2023, the same wireless carrier customer accounted for 13 % of net sales and 4 % of total net accounts receivable balance;

for the three months ended July 31, 2022, it accounted for 16 % of net sales and 19 % of total net accounts receivable balance;

for the nine months ended July 31, 2022, it accounted for 23 % of net sales and 19 % of total net accounts receivable balance.

We also have another distributor customer whose sales were less than 10% of our net sales but for which we had an 11% of total net accounts receivable balance for both the three and nine months ended July 31,2023;

for the three and nine months ended July 31, 2022, it accounted for 5% of total net account receivable balance.

For the three months ended January 31, 2024, no customers accounted for 10% or more of net sales.

For the three months ended January 31, 2023, one wireless carrier customer accounted for 15 % of net sales and 16 % of total net accounts receivable balance.

For the three months ended January 31, 2024, we had two distributor customers whose sales were less than 10 % of our net sales but for which we had 10 % each of total net accounts receivable balance for both customers;

for the three months ended January 31, 2023, both customers accounted for less than 10 % of net sales and 7 % each of total net account receivable balance.

Although these customers have been significant customers of the Company, the written agreements with these customers do not have any minimum purchase obligations and these customers could stop buying our products at any time and for any reason.

A reduction, delay or cancellation of orders from these customers or the loss of these customers could significantly reduce our future revenues and profits.

Note 4 –

Inventories and major vendors

Note 3 – Inventories and major vendors

Inventories, consisting of materials, labor and manufacturing overhead, are stated at the lower of cost or net realizable value.

1 unchanged sentence

Inventories consist of the following (in thousands):

July 31, 2023

January 31, 2024

October 31, 2023

2 unchanged sentences

Finished goods

For the three months ended July 31, 2023, a single vendor accounted for 10 % of inventory purchases.

For the three months ended July 31, 2022, the same vendor accounted for 17% of inventory purchases.

For the nine months ended July 31, 2023, this vendor accounted for 17% of inventory purchases and it accounted for 28% of inventory purchases for the nine months ended July 31, 2022.

For the three months ended January 31, 2024, no single vendor accounted for 10% or more of inventory purchases.

For the three months ended January 31, 2023, two vendors accounted for 12 % and 10 % of inventory purchases.

We have arrangements with this vendor to purchase products based on purchase orders that we periodically issue.

Note 5 –

Other current assets

Note 4 – Other current assets

Other current assets consist of the following (in thousands):

July 31, 2023

January 31, 2024

October 31, 2023

Employee retention credit ("ERC")

Prepaid taxes

Prepaid expense

Reimbursement for tenant improvements

Pursuant to the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), eligible employers are able to claim an ERC, which is a refundable tax credit against certain employment taxes.

If the employer’s employment tax deposits are not sufficient to cover the credit, the employer may get an advance payment from the Internal Revenue Service (IRS).

The period assessed for eligibility of the ERC is on a calendar year basis.

As of July 31, 2023, the remaining portion of the ERC that we have not yet received is included as other receivables in other current assets.

Note 6 –

Accrued expenses and other current liabilities

Note 5 – Accrued expenses and other current liabilities

Accrued expenses consist of the following (in thousands):

July 31, 2023

January 31, 2024

October 31, 2023

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Other accrued expenses

Tenant improvements payable

Accrued receipts represent purchased inventory for which invoices have not been received.

Note 7 –

Loss per share

Note 6 – Loss per share

Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period.

Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding increased by the effects of assuming that other potentially dilutive securities (such as stock options) outstanding during the period had been exercised and the treasury stock method had been applied.

During the three and nine months ended July 31, 2023 we reported a net loss, and in periods with a net loss, the basic loss per share equals the diluted loss per share as all common stock equivalents are excluded from the per share calculation due to their anti-dilutive effect.

Potentially issuable securities that are out-of-the-money totaled 814,154 and 471,464 shares for the three months ended July 31, 2023 and 2022, respectively, and 750,967 and 482,889 shares for the nine months ended July 31, 2023 and 2022, respectively, and were excluded from the calculation of diluted per share amounts because of their anti-dilutive effect.

During the three ended January 31, 2024, we reported a net loss, and in periods with a net loss, the basic loss per share equals the diluted loss per share as all common stock equivalents are excluded from the per share calculation due to their anti-dilutive effect.

Potentially issuable securities that are out-of-the-money totaled 1,068,022 and 749,488 shares for the three months ended January 31, 2024 and 2023, respectively, and were excluded from the calculation of diluted per share amounts because of their anti-dilutive effect.

The following table summarizes the computation of basic and diluted weighted average shares outstanding:

Three Months Ended July 31,

Nine Months Ended July 31,

Three Months Ended January 31,

Weighted average shares outstanding for basic earnings per share

1 unchanged sentence

Weighted average shares outstanding for diluted earnings per share

Note 8 –

Stock-based compensation and equity transactions

On January 10, 2022, we granted a total of 39,666 shares of restricted stock and 106,001 incentive stock options to one manager and three officers.

The shares of restricted stock and incentive stock options vest over four years as follows:

(i) one -quarter of the restricted shares and options vested on January 10, 2023;

and (ii) the remaining restricted shares and options shall vest in 12 equal quarterly installments over the next three years.

All incentive stock options expire 10 years from the date of grant.

On January 10, 2023, we granted a total of 54,092 shares of restricted stock and 108,181 incentive stock options to one manager and three officers.

Note 7 – Stock-based compensation and equity transactions

On January 11, 2023, we granted a total of 54,092 shares of restricted stock and 108,181 incentive stock options to one manager and three officers, respectively.

The shares of restricted stock and incentive stock options vest over four years as follows:

(i) one -quarter of the restricted shares and options shall vest on January 10, 2024;

and (ii) the remaining restricted shares and options shall vest in 12 equal quarterly installments over the next three years.

(i) one -quarter of the restricted shares and options vested on January 10, 2024 and (ii) the remaining restricted shares and options shall vest in 12 equal quarterly installments over the next three years.

Also on January 11, 2023, we granted another manager 50,000 incentive stock options.

These options shall vest in five equal installments on each of the next five anniversaries of January 10, 2023, the grant date.

As of October 31, 2023, the 50,000 incentive stock options granted to the manager were cancelled and forfeited as the manager was no longer employed.

All incentive stock options expire 10 years from the date of grant.

No other shares or options were granted to company employees during the three and nine months ended July 31, 2023 and 2022.

The weighted average fair value of employee stock options that were granted during the nine months ended July 31, 2023 and 2022 was estimated to be $ 3.21 and $ 3.77 , respectively, per share, using the Black-Scholes option pricing model with the following assumptions:

Nine Months Ended July 31,

On August 29, 2023, we granted one employee 10,000 incentive stock options.

These options vested with respect to 2,500 shares on the date of grant, and the remaining shares vests in equal installments thereafter on each of the next three anniversaries of August 29, 2023.

The options expire 10 years from the date of grant.

On November 1, 2023, we granted 15,202 shares of restricted stock to one officer in lieu of cash compensation.

The shares of restricted stock vest over one year as follows:

(i) one -quarter of the restricted shares on January 31, 2024 and (ii) the remaining restricted shares shall vest in three equal quarterly installments.

On January 11, 2024, we granted a total of 110,099 shares of restricted stock and 220,001 incentive stock options to one manager and three officers, respectively.

The shares of restricted stock and incentive stock options vest over four years as follows:

(i) one -quarter of the restricted shares and options shall vest on January 11, 2025 and (ii) the remaining restricted shares and options shall vest in 12 equal quarterly installments over the next three years.

No other shares or options were granted to Company employees during the three months ended January 31, 2024 and 2023.

The weighted average fair value of employee stock options that were granted during the three months ended January 31, 2024 and 2023 was estimated to be $ 1.76 and $ 3.21 , respectively, per share, using the Black-Scholes option pricing model with the following assumptions:

Risk-free interest rate

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The risk-free rate is based on the U.S.

Treasury rate with a maturity date corresponding to the options’

expected life.

Treasury rate with a maturity date corresponding to the options’ expected life.

The dividend yield is based upon the historical dividend yield.

1 unchanged sentence

Descriptions of our stock option plans are included in Note 9 to our audited financial statements included in our Annual Report on Form 10-K for the year ended October 31, 2023.

A summary of the status of the options granted under our stock option plans as of July 31, 2023 and the changes in options outstanding during the nine months then ended is presented in the table that follows:

A summary of the status of the options granted under our stock option plans as of January 31, 2024 and the changes in options outstanding during the three months then ended is presented in the table that follows:

Exercise Price

3 unchanged sentences

Options cancelled

Options outstanding at July 31, 2023

Options exercisable at July 31, 2023

Options vested and expected to vest at July 31, 2023

Weighted average remaining contractual life of options outstanding as of July 31, 2023:

Weighted average remaining contractual life of options exercisable as of July 31, 2023:

Weighted average remaining contractual life of options vested and expected to vest as of July 31, 2023:

Aggregate intrinsic value of options outstanding at July 31, 2023:

Aggregate intrinsic value of options exercisable at July 31, 2023:

Aggregate intrinsic value of options vested and expected to vest at July 31, 2023:

As of July 31, 2023, $ 866,591 and $ 528,229 of expenses with respect to nonvested stock options and restricted shares, respectively, has yet to be recognized but is expected to be recognized over a weighted average period of 2.74 and 1.30 years, respectively.

Options outstanding at January 31, 2024

Options exercisable at January 31, 2024

Options vested and expected to vest at January 31, 2024

Weighted average remaining contractual life of options outstanding as of January 31, 2024:

Weighted average remaining contractual life of options exercisable as of January 31, 2024:

Weighted average remaining contractual life of options vested and expected to vest as of January 31, 2024:

Aggregate intrinsic value of options outstanding at January 31, 2024:

Aggregate intrinsic value of options exercisable at January 31, 2024:

Aggregate intrinsic value of options vested and expected to vest at January 31, 2024:

As of January 31, 2024, $ 929,464 and $ 913,226 of expenses with respect to nonvested stock options and restricted shares, respectively, has yet to be recognized but is expected to be recognized over a weighted average period of 3.0 and 1.3 years, respectively.

Stock option expense

During the three months ended July 31, 2023 and 2022, stock-based compensation expense totaled $ 246,000 and $ 191,000 , respectively, and was classified in selling and general expense.

During the nine months ended July 31, 2023 and 2022, stock-based compensation expense totaled $ 687,000 and $ 498,000 , respectively, and was classified in selling and general expenses.

Note 9 –

Segment information

During the three months ended January 31, 2024 and 2023, stock-based compensation expense totaled $ 255,000 and $ 212,000 , respectively, and was classified in selling and general expense.

Note 8 – Segment information

We aggregate operating divisions into two reporting segments that have similar economic characteristics primarily in the following areas:

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and (5) if applicable, the nature of the regulatory environment.

Based upon this evaluation, as of July 31, 2023, we had two reportable segments –

RF Connector and Cable Assembly (“RF Connector”) segment and Custom Cabling Manufacturing and Assembly (“Custom Cabling”) segment.

The RF Connector segment consists of two divisions and the Custom Cabling segment consists of four divisions.

The six divisions that met the quantitative thresholds for segment reporting are the RF Connector and Cable Assembly division (“RF Connector division”), Cables Unlimited, Rel-Tech, C Enterprises, Schrofftech, and Microlab.

Based upon this evaluation, as of January 31, 2024, we had two reportable segments – RF Connector and Cable Assembly (“RF Connector”) segment and Custom Cabling Manufacturing and Assembly (“Custom Cabling”) segment.

On August 1, 2023, C Enterprises moved and transitioned its physical operations into the RF Connector office in San Diego, CA.

Given the synergies in consolidating both the operating divisions into one building, C Enterprises has now been included in the RF Connector segment.

Further, since the acquisition of C Enterprises in 2019, the customer base for the division has shifted more towards distribution as opposed to direct to end customer which is more aligned with the RF Connector segment.

The segment change of including C Enterprise as part of the RF Connector segment was made retroactive to the beginning of our fiscal year starting November 1, 2022 and reclassified for fiscal 2022 for comparative purposes.

Prior to the transition, C Enterprises was included in the Custom Cabling segment.

The RF Connector segment consists of three divisions and the Custom Cabling segment consists of three divisions.

While each segment has similar products and services, there was little overlapping of these services to their customer base.

The biggest difference in segments is in the channels of sales:

sales of product and services for the RF Connector segment were primarily through the distribution channel, while the Custom Cabling segment sales were through a combination of distribution and direct to the end user.

sales or product and services for the RF Connector segment were primarily through the distribution channel, while the Custom Cabling segment sales were through a combination of distribution and direct to the end customer.

Management identifies segments based on strategic business units that are, in turn, based along market lines.

These strategic business units offer products and services to different markets in accordance with their customer base and product usage.

For segment reporting purposes, the RF Connector and Microlab divisions constitutes the RF Connector segment, and the Cables Unlimited, Rel-Tech, C Enterprises, and Schrofftech divisions constitute the Custom Cabling segment.

We evaluate the performance of each segment based on income or loss before income taxes.

For segment reporting purposes, the RF Connector, C Enterprises and Microlab divisions constitutes the RF Connector segment, and the Cables Unlimited, Rel-Tech, and Schrofftech divisions constitute the Custom Cabling segment.

As reviewed by our chief operating decision maker, we evaluate the performance of each segment based on income or loss before income taxes.

We charge depreciation and amortization directly to each division within the segment.

4 unchanged sentences

We attribute sales to geographic areas based on the location of the customers.

The following table presents the sales by geographic area for the three and nine months ended July 31, 2023 and 2022 (in thousands):

Three Months Ended July 31,

Nine Months Ended July 31,

The following table presents the sales by geographic area for the three months ended January 31, 2024 and 2023 (in thousands):

Three Months Ended January 31,

United States

Foreign Countries:

Net sales, (loss) income before (benefit) provision for income taxes and other related segment information for the three months ended July 31, 2023 and 2022 are as follows (in thousands):

Net sales, income (loss) before provision (benefit) for income taxes and other related segment information for the three months ended January 31, 2024 and 2023 are as follows (in thousands):

Custom Cabling

1 unchanged sentence

Cable Assembly

(Loss) income before benefit for income taxes

Loss before benefit for income taxes

Depreciation and amortization

1 unchanged sentence

Depreciation and amortization

Net sales, (loss) income before (benefit) provision for income taxes and other related segment information for the nine months ended July 31, 2023 and 2022 are as follows (in thousands):

Custom Cabling

Manufacturing and

Cable Assembly

(Loss) income before benefit from income taxes

Depreciation and amortization

Income (loss) before benefit from income taxes

Depreciation and amortization

Note 10 –

We use an estimated annual effective tax rate, which is based on expected annual income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which we operate, to determine its quarterly (benefit) provision for income taxes.

Note 9 – Income taxes

Certain significant or unusual items are separately recognized in the quarter in which they occur and can be a source of variability in the effective tax rates from quarter to quarter.

We recorded income tax (benefits) provisions of ($ 482,000 ) and $ 140,000 for the three months ended July 31, 2023 and 2022, respectively.

The effective tax rate was 22.7 % for the three months ended July 31, 2023, compared to 15.4 % for the three months ended July 31, 2022.

For the nine months ended July 31, 2023 and 2022, we recorded income tax (benefits) provisions of ($ 806,000 ) and $ 196,000 , respectively.

The effective tax rate was 26.6 % for the nine months ended July 31, 2023, compared to 16.4 % for the nine months ended July 31, 2022.

The change in effective tax rate for the nine months ended July 31, 2023 compared to the nine months ended July 31, 2022 was primarily driven by stock-based compensation windfall/shortfalls and the Company's full year forecasted financial loss.

We had $ 168,000 and $ 121,000 of unrecognized tax benefits, as of July 31, 2023 and October 31, 2022, respectively.

The unrecognized tax benefits, if recognized, would result in a net tax benefit of $ 164,000 as of July 31, 2023.

Note 11 –

Intangible assets

Intangible assets consist of the following (in thousands):

July 31, 2023

We recorded income tax benefits of $ 831,000 and $ 160,000 for the three months ended January 31, 2024 and 2023, respectively.

The effective tax rate was 37.6 % for the three months ended January 31, 2024, compared to 12.3 % for the three months ended January 31, 2023.

The change in the effective tax rate is primarily due to the Company's full year forecasted financial loss.

We had $ 245,000 and $ 178,000 of unrecognized tax benefits, as of January 31, 2024 and October 31, 2023, respectively.

The unrecognized tax benefits, if recognized, would result in a net tax benefit of $ 226,000 as of January 31, 2024.

The Company assesses all positive and negative evidence in determining if, based on the weight of such evidence, a valuation allowance is required to be recorded against the deferred tax assets as of January 31, 2024.

The Company has concluded that the positive evidence of indefinite lived nature of certain tax attributes on hand, and cumulative pre-tax book income on a rolling twelve-quarter basis outweigh the negative evidence of recent losses.

Accordingly, the Company has not provided for additional valuation allowance as of January 31, 2024.

The realization of the deferred tax assets is contingent upon the Company’s ability to generate sufficient future taxable income.

In the event that negative evidence outweighs positive evidence in future periods, the Company may need to record additional valuation allowance, which could have a material impact on our financial position.

Note 10 – Intangible assets

Intangible assets consist of the following as of January 31, 2024 and 2023 (in thousands):

January 31, 2024

October 31, 2023

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Non-amortizable intangible assets:

Amortization expense for the nine months ended July 31, 2023 and the year ended October 31, 2022 was $ 1,279,000 and $ 1,282,000 , respectively.

As of July 31, 2023, the weighted-average amortization period for the amortizable intangible assets is 8.78 years.

Note 12 –

Amortization expense for the three months ended January 31, 2024 and the year ended October 31, 2023 was $ 422,000 and $ 1,701,000 , respectively.

As of January 31, 2024, the weighted-average amortization period for the amortizable intangible assets is 8.05 years.

Note 11 – Commitments

We adopted ASU 2016-02 on November 1, 2019, and elected the practical expedient modified retrospective method whereby the lease qualification and classification was carried over from the accounting for leases under ASC 840.

The lease contracts for the corporate headquarters, RF Connector division manufacturing facilities, Cables Unlimited, Rel-Tech, and C Enterprises commenced prior to the effective date of November 1, 2019, and were determined to be operating leases.

All other new contracts have been assessed for the existence of a lease and for the proper classification into operating leases.

The rate implicit in the leases was undeterminable and, therefore, the discount rate used in all lease contracts is our incremental borrowing rate.

We have operating leases for corporate offices, manufacturing facilities, and certain storage units.

Our leases have remaining lease terms of one year to three years, some of which include options to extend the leases for up to five years.

Our leases have remaining lease terms of one year to ten years.

A portion of our operating leases are leased from K&K Unlimited, a company controlled by Darren Clark, the former owner and current President of Cables Unlimited, to whom we make rent payments totaling $ 16,000 per month.

We also have other operating leases for certain equipment.

The components of our facilities and equipment operating lease expenses for the periods ended July 31, 2023 and 2022 were as follows (in thousands):

Three Months Ended July 31,

Nine Months Ended July 31,

The components of our facilities and equipment operating lease expenses for the periods ending January 31, 2024 and 2023 were as follows (in thousands):

Three Months Ended January 31,

Operating lease cost

Short-term lease cost

Other information related to leases was as follows (in thousands):

July 31, 2023

January 31, 2024

October 31, 2023

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Operating leases

Future minimum lease payments under non-cancellable leases as of July 31, 2023 were as follows:

Future minimum lease payments under non-cancellable leases as of January 31, 2024 were as follows:

Year ending October 31,

Operating Leases

2023 (excluding nine months ended July 31, 2023)

2024 (excluding three months ended January 31, 2024)

Total future minimum lease payments

Less imputed interest

Reported as of July 31, 2023

Reported as of January 31, 2024

Operating Leases

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Operating lease liabilities

As of July 31, 2023, operating lease ROU asset was $ 12.0 million and operating lease liability totaled $ 15.7 million, of which $ 1.4 million is classified as current.

There were no finance leases as of July 31, 2023.

On July 11, 2023, we entered into a Third Amendment to Lease (the “Amendment”) with Sorrento West Properties (the “Lessor”), amending that certain AIRCRE Standard Industrial/Commercial Single-Tenant Lease - Net, dated as of December 28, 2021, between the Company and Lessor, under which we lease from Lessor industrial and commercial space located at 16868 Via Del Campo Court, San Diego, California (the “Premises”).

The Amendment provides for an increase in tenant improvements by an additional $ 1,000,000 (the “Additional TIA”) and requires funding of the Additional TIA beginning October 1, 2023, provided certain conditions are met as further set forth in the Amendment.

The primary purpose of the Additional TIA is to cover the costs and expenses for the construction, fit-out and furnishing of the adjacent vacant office spaces located at the Premises, which will be subject to the Managed Client Agreement with RGN-MCA San Diego II, LLC (the “Managed Client Agreement”) and managed services arrangement, as previously disclosed.

In consideration for the Additional TIA, the Amendment provides for an increase in monthly base rent, effective commencing as of October 1, 2023.

The conditions set forth in the Amendment include a finalized build-out budget.

The budget for the construction, fit-out and furnishings of the vacant office for RGN-MCA San Diego II, LLC has not been finalized, and we have a right to terminate the Managed Client Agreement should the budget exceed an amount agreed upon. Therefore, we have not reflected this Amendment in our financials as of July 31, 2023, or included it in our disclosure tables.

Note 13 –

Term Loan and Line of credit

In February 2022, we entered into a loan agreement (the “Loan Agreement”) providing for a revolving line of credit (the “Revolving Credit Facility”) in the amount of $ 3.0 million and a $ 17.0 million term loan (the “Term Loan”, and together with the Revolving Credit Facility, the “Credit Facility”) with Bank of America, N.A.

(the “Bank”).

As of January 31, 2024, operating lease right-of-use asset was $ 15.3 million and operating lease liability totaled $ 20.4 million, of which $ 1.3 million is classified as current.

There were no finance leases as of January 31, 2024.

The Schrofftech facilities, consisting of one building for a total of 7,000 square feet, is leased by RF Industries, Ltd.

under a lease that was renewed effective February 1, 2024, for one year expiring January 31, 2025.

The aggregate monthly rental payment under the new lease currently is $ 4,607 per month.

Note 12 – Term Loan and Line of credit

(the “Bank”).

Amounts outstanding under the Revolving Credit Facility shall bear interest at a rate of 2.0 % plus the Bloomberg Short-Term Bank Yield Index Rate.

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The Credit Facility requires the maintenance of certain financial covenants, including:

(i) consolidated debt to EBITDA ratio not to exceed 3.00 to 1.00;

(ii) consolidated fixed charge coverage ratio of at least 1.25 to 1.00;

(i) consolidated debt to EBITDA ratio not to exceed 3.00 to 1.00 (the “Debt Test”);

(ii) consolidated fixed charge coverage ratio of at least 1.25 to 1.00 (the “FCCR Test”);

and (iii) consolidated minimum EBITDA of at least $ 600,000 for the discrete quarter ended January 31, 2022.

In addition, the Credit Facility contains customary affirmative and negative covenants.

As of July 31, 2023, we were not in compliance with the consolidated debt to EBITDA ratio nor were we in compliance with the consolidated fixed charge coverage ratio covenants (the “Defaults”).

On September 12, 2023, we entered into Amendment No.

1 and Waiver to the Loan Agreement (the “Loan Amendment”) with the Bank, which, among other matters, provided for a temporary waiver of (i) the Defaults, and (ii) compliance with the consolidated debt to EBITDA ratio and the consolidated fixed charge coverage ratio minimum covenants for the quarterly periods ending October 31, 2023, January 31, 2024, April 30, 2024 and July 31, 2024.

Further, pursuant to the Loan Amendment, we are required to maintain (i) (a) until September 21, 2023, minimum liquidity (week-end cash balance plus availability from the Revolving Credit Facility) of $ 4.0 million, and (b) from September 22, 2023 and thereafter, liquidity equal to the greater of (1) $ 4.0 million or (2) 80 % of the liquidity that had been forecast for this date at the fourth week of the forecast;

and (ii) minimum EBITDA of ($ 400,000 ), $ 500,000 , $ 1.0 million, and $ 1.0 million for the quarters ending October 31, 2023, January 31, 2024, April 30, 2024, and July 31, 2024, respectively.

As of July 31, 2023, we have borrowed $ 13,768,000 under the Term Loan and $ 1.0 million from the Revolving Credit Facility.

The foregoing summary description of the Loan Amendment is qualified in its entirety by reference to the complete text of the Loan Amendment, a copy of which is included as Exhibit 10.3 and is incorporated herein by reference.

Note 14 –

Cash dividend and declared dividends

We did not pay any dividends during the three or nine months ended July 31, 2023, nor did we pay any dividends during the three or nine months ended July 31, 2022.

Management ’

s Discussion and Analysis of Financial Condition and Results of Operations  

1 and Waiver to the Loan Agreement (“Loan Amendment No.

1”) with the Bank, which, among other matters, provided for a one-time waiver of our failure to comply with (i) the Debt Test for the period ended July 31, 2023 and (ii) the FCCR Test for the period ended July 31, 2023.

Loan Amendment No.

1 also waived testing for compliance with the Debt Test and FCCR Test for the quarterly periods ending October 31, 2023, January 31, 2024, April 30, 2024 and July 31, 2024.

Further, pursuant to Loan Amendment No.

1, we were required to maintain (i) (a) until September 21, 2023, minimum liquidity (week-end cash balance plus availability from the Revolving Credit Facility) of $ 4.0 million, and (b) from September 22, 2023 and thereafter, liquidity equal to the greater of (1) $ 4.0 million or (2) 80 % of the liquidity that had been forecast for this date at the fourth week of the forecast and (ii) minimum EBITDA of ($ 400,000 ), $ 500,000 , $ 1.0 million, and $ 1.0 million for the quarters ending October 31, 2023, January 31, 2024, April 30, 2024, and July 31, 2024, respectively.

On January 26, 2024, we entered into Amendment No.

2 to the Loan Agreement (“Loan Amendment No.

2”) with the Bank, which, among other matters, eliminated the requirement to maintain minimum EBITDA of $500,000 for the quarter ending January 31, 2024.

Under Loan Amendment No.

2, the line of credit available to the Company under the Revolving Credit Facility was lowered from $ 3.0 million to $ 500,000 .

Further, Loan Amendment No.

2 required that we maintain from September 22, 2023 and thereafter, liquidity of at least $ 2.0 million, rather than the greater of $ 4.0 million or 80 % of the forecast liquidity as was required under Loan Amendment No.

Under Loan Amendment No.

2, the Company was required to pay an additional fee equal to 1 % of the collective outstanding principal balances of the Revolving Credit Facility and Term Loan if the Credit Facility was not repaid in full on or before March 1, 2024.

This additional fee, if applicable, would be due on March 2, 2024.

Further, Loan Amendment No.

2 required that the Company make an additional principal payment of $ 1.0 million on the Term Loan on March 1, 2024, in addition to the existing monthly payments due on the Term Loan.

In connection with Loan Amendment No.

2, we paid the Bank a $ 500,000 paydown on the Revolving Credit Facility, thereby reducing the outstanding balance from $ 1.0 million to $ 500,000 .

On February 29, 2024, we entered into Amendment No.

3 to the Loan Agreement (“Loan Amendment No.

3”) with the Bank, which, among other matters, defers the requirement that the Company make an additional principal payment of $ 1.0 million on the Term Loan, from March 1, 2024, as was required under Loan Amendment No.

2, to April 1, 2024.

Further, Loan Amendment No.

3 reduces the additional fee the Company is required to pay the Bank on March 2, 2024 from 1 % of the collective outstanding principal balances of the Revolving Credit Facility and Term Loan as of March 1, 2024 as required under Loan Amendment No.

2, to 0.50 % of the collective outstanding principal balances of the Revolving Credit Facility and Term Loan as of March 1, 2024.

Additionally, Loan Amendment No.

3 requires the Company to pay the Bank a fee equal to 0.50% of the collective outstanding principal balances of the Revolving Credit Facility and Term Loan as of March 1, 2024, if the Credit Facility is not repaid in full on or before April 2, 2024 (the “April 2024 Fee”).

The April 2024 Fee, if applicable, will be due on April 2, 2024.

Under Loan Amendment No.

3, the Company must continue to maintain liquidity of at least $ 2.0 million and pay the current remaining outstanding balance of $ 500,000 on the Revolving Credit Facility by March 1, 2024, as required under Loan Amendment No.

As of January 31, 2024, we have borrowed $ 12,556,000 under the Term Loan and $ 500,000 from the Revolving Credit Facility.

On March 15, 2024, we entered into the EBC Credit Agreement (as defined below) and used proceeds from the initial drawings under the EBC Credit Facilities (as defined below) to repay in full outstanding obligations under the Loan Agreement and to pay fees, premiums, costs and expenses, including fees payable in connection with the EBC Credit Agreement.

The Loan Agreement was terminated upon entry into the EBC Credit Agreement.

Note 13 – Cash dividend and declared dividends

We did not pay any dividends during the three months ended January 31, 2024, nor during the three months ended January 31, 2023.

Management ’ s Discussion and Analysis of Financial Condition and Results of Operations

This report contains forward-looking statements.

These statements relate to future events or our future financial performance.

In some cases, you can identify forward-looking statements by terminology such as “

may, ” “

will, ” “

should, ” “

except, ” “

plan, ” “

anticipate, ” “

believe, ” “

estimate, ” “

predict, ” “

potential ” 

or  “

continue, ” 

the negative of such terms or other comparable terminology.

In some cases, you can identify forward-looking statements by terminology such as “ may, ” “ will, ” “ should, ” “ except, ” “ plan, ” “ anticipate, ” “ believe, ” “ estimate, ” “ predict, ” “ potential ” or “ continue, ” the negative of such terms or other comparable terminology.

These statements are only predictions.

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The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes and other financial information appearing elsewhere in this Form 10-Q.

Management ’

s Discussion and Analysis of Financial Condition and Results of Operations, ” 

under the caption  “

Risk Factors, ” 

and the audited consolidated financial statements and related notes included in our Annual Report filed on Form 10-K for the year ended October 31, 2022 and other reports and filings made with the Securities and Exchange Commission.

Readers are also urged to carefully review and consider the various disclosures made by the Company which attempt to advise interested parties of the factors which affect our business, including without limitation the disclosures made under the caption “ Management ’ s Discussion and Analysis of Financial Condition and Results of Operations, ” under the caption “ Risk Factors, ” and the audited consolidated financial statements and related notes included in our Annual Report filed on Form 10-K for the year ended October 31, 2023 and other reports and filings made with the Securities and Exchange Commission.

Critical Accounting Policies

Our unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

The preparation of these unaudited condensed consolidated financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities.

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Because inventories have, during the past few years, represented up to one-fourth of our total assets, any reduction in the value of our inventories would require us to take write-offs that would affect our net worth and future earnings.

Allowance for Doubtful Accounts

We record an allowance for doubtful accounts based upon our assessment of various factors.

We consider historical experience, the age of the accounts receivable balance, credit quality of our customers, current economic conditions and other factors that may affect a customer’s ability to pay.

Allowance for Credit Losses

Our accounts receivable arise primarily from sales on credit to customers.

We establish an allowance for credit losses to present the net amount of accounts receivable expected to be collected.

The allowance is determined by using the loss-rate method, which requires an estimation of loss rates based upon historical loss experience adjusted for factors that are relevant to determining the expected collectability of accounts receivable.

Some of these factors include macroeconomic conditions that correlate with historical loss experience, delinquency trends, aging behavior of receivables and credit and liquidity quality indicators for industry groups, customer classes or individual customers.

During the three months ended January 31, 2024, we considered the current and expected future economic and market conditions and concluded that no material adjustment to Credit Losses was required as of January 31, 2024.

Long-Lived Assets Including Goodwill

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This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of our weighted average cost of capital.

As of July 31, 2023, we performed an impairment test analysis for Schrofftech.

As noted above, we test our goodwill, trademarks, and indefinite-lived intangible assets for impairment at least annually, which we have traditionally done in the fourth quarter, or on an interim basis when events or changes in circumstances suggest these assets may be impaired.

Impairment is measured as the excess of the carrying value of the goodwill or indefinite-lived intangible asset over its fair value.

Impairment may result from a number of factors, including performance deterioration, negative cash flows from operations and/or changes in anticipated future cash flows, changes in business plans, adverse economic or market conditions, or other factors beyond our control.

The amount of any impairment must be expensed as a charge to operations.

Schrofftech’s three and nine-months results ended July 31, 2023 triggered an impairment analysis.

Schrofftech was acquired on November 4, 2019 for a total purchase price of $5.3 million, consisting of cash consideration of $4.0 million and $1.3 million in earn-out, of which none was earned.

As of July 31, 2023, Schrofftech has a carrying value of $3.2 million, of which includes $1.1 million in goodwill, $0.5 million in non-amortizable intangible assets and $1.6 million in net amortizable intangible assets.

The analysis performed included a blend of the income approach (discounted cash flow method) and market approach (guideline public company method) to reach a fair value of equity in excess of the fair value to the carrying amount.

The analysis performed in blending the income approach and the market approach incorporates several significant judgments and assumptions about projected revenue growth, future operating margins and discount rates.

There are inherent uncertainties related to these assumptions and our judgment in applying them to the impairment analysis.

Changes in certain events or circumstances could result in changes to our estimated fair values, and may result in future write-downs to the carrying values of these assets.

Impairment charges could adversely affect our financial results, financial ratios and could limit our ability to obtain financing in the future.

We record a tax provision for the anticipated tax consequences of the reported results of operations.

We record a tax provision (benefit) for the anticipated tax consequences of the reported results of operations.

Income taxes are accounted for under the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards.

Deferred tax assets and liabilities are measured using the currently enacted tax rates as of the date of the unaudited condensed consolidated financial statements that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled.

Deferred tax assets and liabilities are measured using the currently enacted tax rates as of the date of the financial statements that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled.

We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.

The calculation of the tax provision involves significant judgment in estimating the impact of uncertainties in the application of GAAP and complex tax laws.

Resolution of these uncertainties in a manner inconsistent with management’s expectations could have a material impact on our financial condition and operating results. 

Stock-based Compensation

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RF Industries, Ltd.

(together with subsidiaries, the “Company,”

“we”, “us”, or “our”) is a national manufacturer and marketer of interconnect products and systems, including high-performance components such as RF connectors and adapters, dividers, directional couplers and filters, coaxial cables, data cables, wire harnesses, fiber optic cables, custom cabling, energy-efficient cooling systems and integrated small cell enclosures.

Through our manufacturing and production facilities, we provide a wide selection of interconnect products and solutions primarily to telecommunications carriers and equipment manufacturers, wireless and network infrastructure carriers and manufacturers and to various original equipment manufacturers (“OEMs”) in several market segments.

(together with subsidiaries, the “Company,” “we”, “us”, or “our”) is a national manufacturer and marketer of interconnect products and systems, including high-performance components such as RF connectors and adapters, dividers, directional couplers and filters, coaxial cables, data cables, wire harnesses, fiber optic cables, custom cabling, energy-efficient cooling systems and integrated small cell enclosures.

We also design, engineer, manufacture and sell energy-efficient cooling systems and integrated small cell solutions and related components.

We operate through two reporting segments:

(i) the RF Connector and Cable Assembly (“RF Connector”) segment, and (ii) the Custom Cabling Manufacturing and Assembly (“Custom Cabling”) segment.

The RF Connector segment primarily designs, manufactures, markets and distributes a broad range of RF connector, adapter, coupler, divider, and cable products, including coaxial passives and cable assemblies that are used in telecommunications and information technology, OEM markets and other end markets.

The Custom Cabling segment designs, manufactures, markets and distributes custom copper and fiber cable assemblies, complex hybrid fiber optic and power solution cables, electromechanical wiring harnesses, wiring harnesses for a broad range of applications in a diverse set of end markets, energy-efficient cooling systems for wireless base stations and remote equipment shelters and custom designed, pole-ready 4G and 5G small cell integrated enclosures.

For the nine months ended July 31, 2023, revenues from the Custom Cabling segment were generated from the sale of fiber optics cable, copper cabling, custom patch cord assemblies, and wiring harnesses, which collectively accounted for 55% of the Company’s total sales.

Revenues from the RF Connector segment were generated from the sales of RF connector products and cable assemblies and accounted for 45% of total sales for the nine months ended July 31, 2023.

The Custom Cabling segment designs, manufactures, markets and distributes custom copper and fiber cable assemblies, complex hybrid fiber optic and power solution cables, electromechanical wiring harnesses for a broad range of applications in a diverse set of end markets, energy-efficient cooling systems for wireless base stations and remote equipment shelters and custom designed, pole-ready 4G and 5G small cell integrated enclosures.

For the three months ended January 31, 2024, revenues from the Custom Cabling segment were generated from the sale of fiber optics cable, copper cabling, custom patch cord assemblies, and wiring harnesses, which collectively accounted for 35% of the Company’s total sales.

Revenues from the RF Connector segment were generated from the sales of RF Connector products and cable assemblies and accounted for 65% of total sales for the three months ended January 31, 2024.

The RF Connector segment mostly sells standardized products regularly used by customers and, therefore, has a more stable revenue stream.

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Historically, we have been able to fund our liquidity and other capital requirements from funds we generated from operations.

However, we have incurred operating losses during the three and nine months ended July 31, 2023.

However, we have incurred an operating loss during the three months ended January 31, 2024.

During the period, we have implemented certain cost-cutting measures to reduce our operating expenses and to help drive positive operating cash flow and increase liquidity.

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We intend to continue to pursue additional continuous improvement and cost reduction measures, as well as organic growth in revenue and profitability.

As of July 31, 2023, we had a total of $4.1 million of cash and cash equivalents compared to a total of $4.5 million of cash and cash equivalents as of October 31, 2022.

As of July 31, 2023, we had working capital of $22.8 million and a current ratio of approximately 2.9:1 with current assets of $34.8 million and current liabilities of $12.1 million.

We believe that the amount of cash remaining, plus the amount available to us under the Revolving Credit Facility, will be sufficient to fund our anticipated liquidity needs.

As of July 31, 2023, we had $17.2 million of backlog, compared to $27.8 million as of October 31, 2022.

The decrease in backlog relates primarily to shipments made against orders for our hybrid fiber cables.

As of January 31, 2024, we had a total of $4.5 million of cash and cash equivalents compared to a total of $4.9 million of cash and cash equivalents as of October 31, 2023.

As of January 31, 2024, we had working capital of $21.6 million and a current ratio of approximately 2.9:1 with current assets of $32.9 million and current liabilities of $11.3 million.

We believe that the amount of cash remaining will be sufficient to fund our anticipated liquidity needs.

As of January 31, 2024, we had $16.2 million of backlog, compared to $16.1 million as of October 31, 2023.

Since purchase orders are submitted from customers based on the timing of their requirements, our ability to predict orders in future periods or trends in future periods is limited.

Furthermore, purchase orders may be subject to cancellation from customers, although we have not historically experienced material cancellations of purchase orders.

In the nine months ended July 31, 2023, we generated $2.6 million of cash in our operating activities.

This net inflow of cash is primarily related to an increase in other current assets of $4.6 million, the collections of accounts receivable of $5.4 million, $1.8 million from depreciation and amortization, and $0.7 million from stock-based compensation expense.

The cash usage was primarily due to accrued expenses of $4.3 million and our net loss of $2.2 million.

The cash generated by other current assets represents $4.6 million, which primarily consists of $2.8 million of reimbursement for tenant improvements and $1.5 million received from ERC.

During the nine months ended July 31, 2023, we also spent $2.3 million on capital expenditures, and $1.8 million in Term Loan payments.

The cash used in operating activities and the amounts spent on capital expenditures were partially offset by $0.1 million of proceeds received from the exercise of stock options.

As noted above, we also drew $1.0 million from the Revolving Credit Facility as of July 31, 2023, primarily to fund leasehold improvements to the new corporate headquarters.

Our goal to expand and grow our business both organically and through acquisitions may require material additional capital equipment.

In the three months ended January 31, 2024, we generated $0.8 million of cash in our operating activities.

This net inflow of cash is primarily related to the collections of accounts receivable of $2.0 million, $0.8 million from inventories, $0.6 million from depreciation and amortization, $0.3 million from stock-based compensation expense and $0.1 million from right of use assets.

The cash usage was primarily due to the net loss of $1.4 million, deferred income taxes of $0.9 million and payments on accounts payable of $0.7 million.

During the three months ended January 31, 2024, we also spent $0.1 million on capital expenditures, $0.6 million in Term Loan payments and $0.5 million payments on the Revolving Credit Facility.

Our goal to expand and grow our business both organically and through acquisitions may require material additional capital equipment.

In the past, we have purchased all additional equipment, or financed some of our equipment and furnishings requirements through capital leases.

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From time to time, we may undertake acquisitions of other companies or product lines in order to diversify our product and solutions offerings and customer base.

Conversely, we may undertake the disposition of a division or product line due to changes in our business strategy or market conditions. Acquisitions may require the outlay of cash, which may reduce our liquidity and capital resources while dispositions may increase our cash position, liquidity and capital resources.

Conversely, we may undertake the disposition of a division or product line due to changes in our business strategy or market conditions.

Acquisitions may require the outlay of cash, which may reduce our liquidity and capital resources while dispositions may increase our cash position, liquidity and capital resources.

Since our goal is to continue to expand our operations and accelerate our growth through future acquisitions, we may use some of our current capital resources to fund acquisitions we may undertake in the future.

Results of Operations

Three Months Ended July 31, 2023 vs.

Three Months Ended July 31, 2022

Net sales for the three months ended July 31, 2023 (the “fiscal 2023 quarter”) decreased by 34%, or $8.1 million, to $15.7 million as compared to the three months ended July 31, 2022 (the “fiscal 2022 quarter”).

Three Months Ended January 31, 2024 vs.

Three Months Ended January 31, 2023

Net sales for the three months ended January 31, 2024 (the “fiscal 2024 quarter”) decreased by 26.2%, or $4.8 million, to $13.5 million as compared to the three months ended January 31, 2023 (the “fiscal 2023 quarter”).

Net sales for the fiscal 2024 quarter at the Custom Cabling segment decreased by $1.9 million, or 28.8%, to $4.7 million, compared to $6.6 million in the fiscal 2023 quarter.

The decrease was primarily the result of a decrease in sales of hybrid fiber cables to wireless carrier customers and a decrease in sales of small cell products and systems to customers in the Tier-1 wireless ecosystem.

Net sales for the fiscal 2023 quarter at the RF Connector segment decreased by $2.7 million, or 25.7%, to $7.8 million as compared to $10.5 million in the fiscal 2022 quarter, primarily due to a decrease in sales related to carrier projects involving approved RF components.

The decrease was primarily the result of a $2.5 million decrease in sales of hybrid fiber cables to wireless customers at Cables Unlimited.

Net sales for the fiscal 2024 quarter at the RF Connector segment decreased by $2.9 million, or 24.8%, to $8.8 million as compared to $11.7 million in the fiscal 2023 quarter, primarily due to a decrease in sales related to lower levels of inventory being kept on hand at our distributor customers based on seasonality and the lower carrier capital expenditure environment, and fewer carrier projects involving approved RF components.

Gross profit for the fiscal 2024 quarter decreased by $1.8 million to $3.3 million, and gross margins decreased to 24.5% of sales compared to 27.7% of sales in the fiscal 2023 quarter.

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Engineering expenses decreased by $0.2 million to $0.8 million in the fiscal 2024 quarter compared to $1.0 million in the fiscal 2023 quarter.

The decrease was the result of headcount reduction and other cost savings initiatives.

Engineering expenses represent costs incurred relating to the ongoing research and development of current and new products.

Selling and general expenses decreased by $0.3 million to $5.1 million (32.9% of sales) compared to $5.4 million (22.5% of sales) in the third quarter last year primarily due to a decrease in variable compensation related to commissions and bonuses as a result of the lower sales.

We also incurred a one-time charge of $194,000 (related to the move of our C Enterprises and Microlab divisions, and including system implementation charges and severance) compared to acquisition-related expenses and a one-time charge of $114,000 (including professional fees, system implementation charges and severance).

For the fiscal 2023 quarter, the Custom Cabling segment had pretax loss of $0.7 million and the RF Connector segment had a pretax loss of $1.1 million, as compared to $0.6 million income and $1 million income, respectively, for the comparable quarter last year.

The pretax loss at the Custom Cabling segment was due to the decrease in sales of hybrid fiber cables to wireless carrier customers and a decrease in sales of small cell products and systems to customers in the Tier-1 wireless ecosystem.

The decrease in the pretax net income at the RF Connector segment was primarily due to the decrease in Microlab sales related to carrier projects involving approved RF components.

For fiscal 2023 and 2022 quarters, we recorded income tax (benefit) provision of ($482,000) and $140,000, respectively.

Selling and general expenses decreased by $0.7 million to $4.6 million (34.3% of sales) compared to $5.3 million (28.9% of sales) in the first quarter last year primarily due to a decrease in variable compensation related to commissions and bonuses as a result of the lower sales along with cost savings relating to reduced office and IT.

We also incurred a one-time charge of $0.1 million relating to consulting spend and inventory appraisal in the fiscal 2024 quarter.

For the fiscal 2024 quarter, the Custom Cabling segment had pretax loss of $0.3 million and the RF Connector segment had a pretax loss of $1.7 million, as compared to $0.8 million loss and $0.1 million income, respectively, for the comparable quarter last year.

The pretax loss at the Custom Cabling segment was due to the decrease in sales of hybrid fiber cables to wireless carrier customers.

The decrease in the pretax net income at the RF Connector segment was primarily due to the decrease in sales related to lower levels of inventory being kept on hand at our distributor customers based on seasonality and the lower carrier capital expenditure environment, and fewer carrier projects involving approved RF components.

For fiscal 2024 and 2023 quarters, we recorded income tax benefit of $831,000 and $160,000, respectively.

The effective tax rate was 37.9% for the fiscal 2024 quarter, compared to 12.1% for the fiscal 2023 quarter.

The change in the effective tax rate from the fiscal 2022 quarter to fiscal 2023 quarter was primarily driven by the increased benefit from research and development credits and the Company's full year forecasted financial loss.

For the fiscal 2023 quarter, net loss was $1.6 million and fully diluted loss per share was $0.16, compared to a net income of $0.8 million and fully diluted earnings per share of $0.08 for the fiscal 2022 quarter.

The change in the effective tax rate from the fiscal 2024 quarter to fiscal 2023 quarter was primarily driven by the Company’s full year forecasted financial results.

For the fiscal 2024 quarter, net loss was $1.4 million and fully diluted loss per share was $0.13, compared to a net loss of $1.2 million and fully diluted earnings per share of $0.11 for the fiscal 2023 quarter.

For the fiscal 2024 quarter, the diluted weighted average shares outstanding was 10,410,580 as compared to 10,222,540 for the fiscal 2023 quarter.

Nine Months Ended July 31, 2023 vs.

Nine Months Ended July 31, 2022

Net sales for the nine months ended July 31, 2023 (the “fiscal 2023 nine-month period”) of $56.3 million decreased by 9.6%, or $6.0 million, compared to the nine months ended July 31, 2022 (the “fiscal 2022 nine-month period”).

The decrease in net sales is attributable to the Custom Cabling segment, which decreased by $9.5 million, or 23.6%, to $30.8 million compared to $40.3 million in the fiscal 2022 nine-month period, primarily related to wireless carrier network deployment slowdowns across the industry in 2023 impacting both our hybrid fiber sales and our small cell and direct air cooling products.

Net sales for the fiscal 2023 nine-month period at the RF Connector segment increased by $3.6 million, or 16.4%, to $25.5 million compared to $21.9 million in the fiscal 2022 nine-month period.

The increase was primarily the result of the Microlab acquisition on March 1, 2022.

Gross profit for the fiscal 2023 nine-month period decreased by $2.4 million to $15.0 million and gross margins decreased to 26.7% of sales from 28.0% of sales in the fiscal 2022 nine-month period.

The decreases in gross profit and gross margins were primarily related to the overall decrease in sales.

Engineering expenses increased by $0.4 million to $2.5 million for the fiscal 2023 nine-month period compared to $2.1 million in the fiscal 2022 nine-month period.

The increase was primarily due to additional engineering expenses during the fiscal 2023 nine-month period related to the engineering efforts associated with our integrated systems products and three full quarters of Microlab.

Engineering expenses represent costs incurred relating to the ongoing research and development of new products.

Selling and general expenses increased by $1.4 million to $15.2 million (27.0% of sales) compared to $13.8 million (22.2% of sales) in the nine-month period last year.

Microlab, which was acquired on March 1, 2022, accounted for $3.6 million of the selling and general expenses, as compared to $2.0 million for the same period last fiscal year.

The increase at Microlab was offset by decreases in variable compensation related to commissions and bonus as a result of the lower sales overall.

We also incurred one-time charges totaling $0.8 million related to an additional rent expense of $444,000 (of which $387,000 was non-cash) related to lease accounting, $213,000 in facility move expenses, severance of $75,000 and $45,000 in ERP system implementations in the fiscal 2023 nine-month period compared to acquisition related expenses and other one-time charges (including attorney fees, due diligence and broker fees) which accounted for $1.6 million for the fiscal 2022 nine-month period.

For the fiscal 2023 nine-month period, we recorded a pretax loss for the Custom Cabling segment of $0.8 million and a pretax loss for the RF Connector segment of $1.2 million, as compared to $1.7 million and $1.6 million of income, respectively, for the comparable nine-month period last year.

The pretax loss at the Custom Cabling segment was primarily due to the decrease in sales of hybrid fiber cables to our wireless carrier customers and a decrease in sales of small cell products and systems to customers in the Tier-1 wireless ecosystem.

The decrease in the pretax net income at the RF Connector segment was primarily due to the decrease in sales related to carrier projects involving approved RF components.

For the fiscal 2023 and 2022 nine-month periods, we recorded income tax (benefit) provision of ($806,000) and $196,000, respectively.

The effective tax rate was 26.6% for the fiscal 2023 nine-month period, compared to 16.4% for the fiscal 2022 nine-month period.

The change in effective tax rate for the fiscal 2023 and 2022 nine-month periods was primarily driven by stock-based compensation windfall/shortfalls and the Company’s full year forecasted financial loss.

For the fiscal 2023 nine-month period, net loss was $2.2 million and fully diluted loss per share was $0.22 as compared to a net income of $1.0 million and fully diluted earnings per share of $0.10 for the fiscal 2022 nine-month period.

For the fiscal 2023 nine-month period, the diluted weighted average shares outstanding was 10,267,652 as compared to 10,223,209 for the fiscal 2022 nine-month period.

Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide the information required under this Item.

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What changed 10-Q

Item 1. Financial Statements